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Case C-589/13 Familienprivatstiftung Eisenstadt – Interim Tax on Private Foundations

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October 21, 2015

Re Familienprivatstiftung Eisenstadt concerned the Austrian system of Interim Tax (IT) imposed on resident Private Foundations (PFs). IT applied to all PFs making gifts from certain categories of income to beneficiaries whether resident or non-resident in Austria. However, for the purposes of computing the taxable amount of IT, Austrian tax legislation permitted a deduction for payments made to all beneficiaries save for an important category of persons – beneficiaries resident in jurisdictions which have concluded an OECD Model Double Tax Treaty (DTT) with Austria (in which case Austria did not have the right to tax the gifts granted to those beneficiaries as per the Other Income Article).

The CJEU found that the gifts made by the PF fell within the scope of the free movement of capital such that (current) TFEU, Art 63(1) was engaged. The IT regime was held to restrict the free movement of capital as PFs making payments to resident beneficiaries will, all other things being equal, always have greater financial means at its disposal. Further, the IT serves as a material disincentive for the founder of the PF and the PF itself if there are non-resident beneficiaries in jurisdictions which have concluded a DTT with Austria. Further, the calculation of the IT was capable of resulting in a disadvantage in terms of cash-flow in a cross-border scenario as opposed to in a domestic scenario.

 

The free movement of capital may be legitimately restricted where, as per TFEU Art 65(1)(a), the taxpayers are not in the same situation with regards to their place of residence. It was noted that the PF which made gifts to a resident beneficiary was in a comparable situation to a PF which made gifts to non-resident beneficiaries as, in both cases, the PF made gifts from its assets or increases in such assets. Interestingly, the court added that the renunciation by Austria of its taxing jurisdiction over the capital gains (of Austrian-source gifts) to non-residents (by way of a DTT) meant that Austria was precluded from invoking the differences in taxability of the two groups of PFs (those which made gifts to residents and those which made gifts to non-resident beneficiaries resident in a DTT jurisdiction).